China's Problem

The Trump Administration is listing another $200 billion worth of Chinese goods that could be subjected to a tariff before being sold in the USA.  This is in response to the Chinese imposition of $50 billion in tariffs on US products.  This is starting to present the Chinese with a problem.  What can they do in response?  China has already threatened tariffs on essentially all of the US products sold in China.  The Chinese are running out of American made products to tax.  That leaves a few options if the Chinese still want to retaliate against the US tariffs.  First, China could sell its US government debt.  If China were to dump its $800 billion or so of Treasury bonds, it could drive the price of those securities down in the short term and raise American interest rates.  This is problematic, however, for the Chinese.  They would lose money on the sale rather than taking in additional revenue from a tariff.  The loss could be as high as $50 billion.  In addition, there might prove to be a great many buyers for the US treasuries.  Interest rates in Europe are now much lower than in the USA.  European institutions might be ready to buy the treasury bonds to get an even higher return than currently available.  The result might then be that the Chinese lose on the sale, but American interest rates rapidly return to their present level without any price to the US economy.

A second Chinese option is the placement of limitations on American investment in China or sales of American services in China.  Neither of these works well either.  Limiting investment will just slow Chinese economic growth.  Prevention of sales of American services has the same consequence.  This option would likely hurt China more than the USA.

No doubt, the people in Beijing have already got a contingency plan for the latest US move.  I'm curious to see what it is.